El Salvador, Bitcoin, and the IMF
El Salvadoran President Nayib Bukele Upsets the Powers That Be
A few weeks ago, the El Salvadoran congress passed a bill to make bitcoin legal tender within its borders. Shortly after passing the bill, the president of El Salvador, Nayib Bukele, announced that all adults in El Salvador would be airdropped the equivalent of $30USD in bitcoin as one of the steps in developing a bitcoin ecosystem in the country. And, oh yeah, El Salvador was going to use the clean geothermal energy produced by volcanoes to mine bitcoin.
Obviously, Bitcoin enthusiasts rejoiced as all of this groundbreaking news flowed out of El Salvador; “hyperbitcoinization” was becoming a real thing, or so it seemed.
While I surely felt like this was a bold step, one that I applauded Bukele and the El Salvadoran Congress for taking, I still had my questions. Some of these included:
Who is Nayib Bukele?
In a country with one of the highest murder rates in the world, will it be safe for people to be walking around with even trace amounts of this valuable digital asset on their mobile device?
How will the U.S. and the IMF (International Monetary Fund) react to this?
Let’s start with the first question. Nayib Bukele is a political outsider and a millennial who had relied heavily on social media as a means to communicate with El Salvadorans during his presidential campaign. He didn’t include many details on how he would govern during his campaign, though, and, since his election, he has employed some authoritarian tactics including marching soldiers into congress to push through a bill (not the bitcoin-as-legal-tender bill); his “New Ideas Party” firing five key members of El Salvador’s Supreme Court as well as its attorney general, in what has been considered an unconstitutional move; and using lethal fire to fight criminal gangs that have driven up the country’s murder rate. These didn’t sound like great things, but since I have something of a behind-the-scenes understanding of how poorly mainstream media portrays global leaders who go against the grain, I asked an El Salvadoran friend of mine what she thought of Bukele. She simply said that she likes him and that most of the country stands behind him. And she was right; he currently has an 84% approval rating. After listening to him speak in the interview below, I got some sense of why people seem to like him so much. He’s sharp, and yet quite down-to-earth.
Moving on to my second question. I asked this same friend what she thought about bitcoin adoption in El Salvador. Her response was something to the effect of, “Oh yeah…that; no one cares.” This literally made me laugh out loud. I wasn’t surprised. I simply loved the notion that an arena full of mostly gringos in Miami were pumped about El Salvador’s newfound role in the Bitcoin revolution (see video below), yet, there I was sitting across the table from an El Salvadoran telling me that El Salvadorans don’t really care about this news. At least not yet.
In all honesty, her response didn’t end there, and it wasn’t so cut and dry. She went on to explain how it isn’t so much that El Salvadorans don’t care, but more that they don’t really understand what bitcoin is and are, therefore, scared of it. This seemed perfectly logical to me, and, because of this, my second question seemed hardly worth asking. If El Salvadorans actually adopt bitcoin as a currency, time will tell if storing it on their phones will present financial and/or physical safety issues.
And so on to my third and final question: How will the U.S. and the IMF react to this? To answer this question, it’s first important to understand the role that the U.S. dollar plays in El Salvador, and also how the IMF works. To understand more about both, I highly recommend listening to what the brilliant Lyn Alden had to say about these topics in the interview below. I’ve transcribed some of her words from the interview below the video link.
Lyn Alden on how the IMF works:
[The IMF] was established decades ago. It’s kind of part and parcel with the petrodollar system and the Bretton Woods system, this whole modern era of dollar dominance. And, so, there [are] multiple countries that are involved to ensure that it is funded, led by the United States. And so you have these institutions like the World Bank or the IMF that are almost like error-correcting mechanisms for the system. The system on its own is not super well-designed; it’s not super sustainable; it’s not very self-correcting, right? So, a lot of these countries, they get dollar-based debts. The dollar strengthens, and then they (the countries) default on their debt, and then there’s a big economic crisis, and so these institutions come in and they say, “We can give you that loan, but you have to change this.” It kind of softens the volatility a little bit, but it also, in the long run, makes these countries more reliant on these external organizations.
The “but you have to change this” quote within the quote above needs to be unpacked a bit. When developing countries like El Salvador are unable to repay their loans from organizations like the IMF and the World Bank, these institutions do everything from demanding natural resources as payment to forcing these countries to impose austerity measures upon their people in efforts to procure funds to pay down their debt. The IMF and the World Bank are more, and worse, than simply “error-correcting mechanisms”; in reality, they would be better described as predatory loan sharks. Read Globalization and Its Discontents (Stiglitz) or Confessions of an Economic Hitman (Perkins) for more on this. You’ll quickly learn that the IMF and the World Bank were designed to keep developing countries poor and subservient to the U.S., or at least to the U.S. Dollar.
Lyn Alden on the U.S. Dollar’s role in countries like El Salvador, countries outside of the U.S. in which the U.S. Dollar is deemed an official currency:
It’s kind of like relying on a gold standard, but messier. They are relying on a currency that they cannot print. So, they are relying on getting those from the United States. And, so, as you pointed out, there are some advantages. You don’t get devalued quite as quickly. You still get devalued, but not as rapidly as most emerging market currencies do. On the other hand, if there’s a liquidity crisis, their central bank cannot create new ones (dollars). If they denominate some of their debts in dollars, if there is basically a dollar shortage, they can’t service those debts. Also, because the country is so reliant on either part of how it gets dollars… If you are a country that either has dollar-based debts or is a dollarized nation, you rely on exports or remittances in order to get dollars. Some countries could be oil nations. They export oil. Other ones could have other commodities or other types of goods. And for this one in particular (El Salvador), they are heavily reliant on remittances.
Remittances are payments that workers who work abroad make to their family, friends, and acquaintances back home. As Lyn Alden said, El Salvador’s economy relies heavily on remittances, and since Bukele stated that “One of the key drivers of the law (bitcoin as legal tender) is to help people sending remittances back to El Salvador”, bitcoin has the potential to “disrupt” the remittance market in El Salvador. In other words, since it costs much less for people to send bitcoin than it does to send dollars using traditional services, bitcoin has the potential to gain traction in this world of remittances made to El Salvadorans.
(Remittance stat from Tweet above seems to come from here.)
Lyn Alden’s thoughts on the whether bitcoin is a threat to the U.S. Dollar, especially in places like El Salvador:
In a sense, yeah. From the IMF’s perspective, it’s hard to read exactly what they’re thinking. I am sure that there are some economists there that haven’t studied bitcoin, or they’re skeptical [of] it, and so they could be naturally worried that if bitcoin’s volatile or loses value that it could be bad for El Salvador. On the other hand, I think there are other ones that maybe have the opposite concern that bitcoin could do well, and that, therefore, basically, it impacts the global monetary order that has been in place for a while.
Something tells me it’s a bit more of the latter.
Lyn Alden’s thoughts on what happens to leaders of developing countries who “mess around with the money system”:
So, there are all sorts of dictators in the world, and they tend to get left alone, but if the dictators kind of mess around with the money system, that’s when they tend to attract some of the ire of these external sources (e.g., the IMF).
(Author’s note: Neither I nor Lyn Alden is insinuating Bukele is a dictator; he was democratically elected. Let’s just say that the U.S. and extensions of the U.S. like the IMF don’t like when leaders of developing countries that are reliant on them mess with the monetary policy that features the U.S. Dollar at its center.)
And so what did we see directly in the wake of El Salvador announcing its newfound relationship with bitcoin? Blowback from the IMF and the World Bank.
First, the IMF saw “legal and economic issues with El Salvador’s bitcoin move.” El Salvador’s move apparently put IMF-backed programs within El Salvador in jeopardy. This has led to investors who are concerned about a lack of IMF support within the country demanding higher premiums to hold Salvadoran debt (bonds). Odd that the article linked above reports Citibank and JP Morgan taking the same tone with El Salvador that the IMF has taken. It’s almost like all of these institutions have a lot to lose here, and don’t really care about the people of El Salvador at all.
And then we had the World Bank state that it cannot help El Salvador with its bitcoin implementation. A World Bank spokesperson stated “[Bitcoin implementation] is not something the World Bank can support given the environmental and transparency shortcomings.” Odd that the World Bank doesn’t seem to have an issue working with countries that rape the earth of its natural resources or contribute massively to global warming, yet bitcoin mining is just too much of an environmental concern for it. You know, kind of like how the World Bank hasn’t stopped working with Mexico despite the fact that one its state-owned oil companies was responsible for literally lighting the Gulf of Mexico on fire last week. I’ll keep my eyes open for a piece that details just how upset the World Bank is about this environmental catastrophe, and I’ll be sure to share it once I find it.
As for transparency, I would very much like the World Bank to stop with the clown talk. Bitcoin is the most transparent financial product ever created.
So, will bitcoin catch on as legal tender in El Salvador? It still seems too early to tell. However, Bukele may have set the stage for more countries to follow suit. We know that Paraguay is now considering making bitcoin legal tender, as well. If El Salvador is the first domino to fall, bitcoin may be on its way to fulfilling its promise as empowerment for those who have historically been disempowered. We shall see how this drama plays out. For now, I hope that bitcoin does at least disrupt the El Salvadoran remittance market, and that El Salvadorans remain both financially and physically safe when using bitcoin, if they chose to use it at all.
Best,
Frank
Twitter: @frankcorva
Jumping the gun here, but I’m also a little worried about Dutch Disease with some Bitcoin mining tax-free havens. Really a non-concern for the foreseeable future, but thinking of problems like the oil industry in places like Angola. Hoping it can be thought about and mitigated early if Bitcoin mining operations do take off there.
Nice one 👍 Thanks, Frank - I guess the most interesting thing for me is if El Salvador will actually make an industry out of geothermal Bitcoin mining. If that really does happen, then I wonder if that wealth will be distributed to its citizens. Hoping for the best, but not necessarily surprised if nothing comes of it.